There is a new and improved tax incentive for hybrid cars started from January 01, 2006, which are much better then previous tax incentives. The new law allows a $400 to $3400 tax credit depending on model. This is better because it a tax credit directly reduces taxes owed, as opposed to simply reducing taxable income (before January 1, 2006 the incentives was deduction).

The IRS has not announced how the new tax credit will going to work. So there are confusions. But the American Council for an Energy Efficient Economy (ACEEE) has provided the following estimates which will give you a general idea

This table gives you a general idea how much tax credit you will get for particular vehicle. But you should wait for IRS announcement to determine exact hybrid tax credit amounts.

There are some basics you should be ware of about tax incentives:

· Vehicle must be Purchase and get delivered on or after Jan. 1, 2006.

· Must be a new vehicle

· Purchase the vehicle with the intention of using it, not re-selling it.

The tax credit is set to expire in 2009 and will Phase-Out set by step. It s depend on number of vehicles an automaker has sold. Once an automaker has sold 60,000 hybrid vehicles the tax credit for that automakers’ hybrids is slowly reduced over the next five consecutive quarters.

Here is the Phase-Out steps detail:

• Beginning January 1, 2006 and up through the quarter that the automaker sells 60,000 hybrid vehicles, 100% of the credit is allowed.
• 100% of the hybrid car tax credit continues for the next consecutive quarter.
• The next two quarters after that, the tax credit is reduced to 50% of the original hybrid car tax credit.
• Then, for the next two quarters after that, the tax credit is reduced to 25% of the original hybrid car tax credit.
• Finally, the hybrid car tax credit for that automakers’ hybrids drops to zero.

Tax incentives before January 01, 2006:

Energy Policy Act of 2005 which allow superior tax incentives, certain hybrid cars were eligible for the Clean-Burning Fuel Tax Deduction for tax years 2004 and 2005.

Hybrid cars eligible are:

· 2005 -2006 Ford Escape Hybrid

· 2000-2006 Honda Insight

· 2003-2006 Honda Civic Hybrid

· 2005-2006 Honda Accord Hybrid

· 2001-2005-2006 Toyota Prius

· 2006 Toyota Highlander Hybrid

· 2006 Lexus RX 400h

· 2006 Mercury Mariner Hybrid

The clean-buring fuel deduction is a federal tax deduction up to $2,000 for taxpayers for hybrid vehicles first put into service in 2004 and 2005. The deduction decreases to $500 for hybrid cars placed into service in 2006 and there is no deduction for subsequent years.

Some relevant details:

• This is a one time deduction and must be taken in the year that the hybrid car is originally used.
• The deduction only applies to the original owner.
• The taxpayer must use form 1040, although itemizing is not necessary
• The deduction was a one-time deal.

State Incentives:

• Arkansas Hybrid vehicle purchase Tax Incentives
• Arizona Hybrid vehicle purchase Tax Incentives
• California Hybrid vehicle purchase Tax Incentives
• Colorado Hybrid vehicle purchase Tax Incentives
• Connecticut Hybrid vehicle purchase Tax Incentives
• DC - Washington DC Hybrid vehicle purchase Tax Incentives
• Florida Hybrid vehicle purchase Tax Incentives
• Georgia Hybrid vehicle purchase Tax Incentives
• Iowa Hybrid vehicle purchase Tax Incentives
• Illinois Hybrid vehicle purchase Tax Incentives
• Louisiana Hybrid vehicle purchase Tax Incentives
• Massachusetts Hybrid vehicle purchase Tax Incentives
• Maryland Hybrid vehicle purchase Tax Incentives
• Maine Hybrid vehicle purchase Tax Incentives
• Michigan Hybrid vehicle purchase Tax Incentives
• Minnesota Hybrid vehicle purchase Tax Incentives
• Missouri Hybrid vehicle purchase Tax Incentives
• Mississippi Hybrid vehicle purchase Tax Incentives
• North Carolina Hybrid vehicle purchase Tax Incentives
• North Dakota Hybrid vehicle purchase Tax Incentives
• New Jersey Hybrid vehicle purchase Tax Incentives
• New Mexico Hybrid vehicle purchase Tax Incentives
• New York Hybrid vehicle purchase Tax Incentives
• Ohio Hybrid vehicle purchase Tax Incentives
• Oklahoma Hybrid vehicle purchase Tax Incentives
• Oregon Hybrid vehicle purchase Tax Incentives
• Pennsylvania Hybrid vehicle purchase Tax Incentives
• Rhode Island Hybrid vehicle purchase Tax Incentives
• South Carolina Hybrid vehicle purchase Tax Incentives
• Tennessee Hybrid vehicle purchase Tax Incentives
• Texas Hybrid vehicle purchase Tax Incentives
• Utah Hybrid vehicle purchase Tax Incentives
• Virginia Hybrid vehicle purchase Tax Incentives
• Vermont Hybrid vehicle purchase Tax Incentives
• Washington Hybrid vehicle purchase Tax Incentives
• Wisconsin Hybrid vehicle purchase Tax Incentives
• West Virginia Hybrid vehicle purchase Tax Incentives
• Wyoming Hybrid vehicle purchase Tax Incentives